CONTENTS. 1. General Overview 2. 2. International Developments 5. 3. Domestic Economic Conditions 8

1 CONTENTS 1. General Overview 2 2. International Developments 5 3. Domestic Economic Conditions 8 Domestic Economic Activity Employment Consumer Price Index 4. Export Commodities Review 15 Mineral Exports Agriculture, Logs and Fisheries Exports 5. Balance of Payments 18 6. Monetary Developments 20 Interest rates and Liquidity Money Supply Lending 7. Public Finance 22 Special Article 24 Papua New Guinea s Total External Exposure For the Record 32 Glossary of Terms and Acronyms 33 Reference For the Record 39 Reference 40 Statistical Section 41 List of Tables S1 The contents of this publication may be reproduced provided the source is acknowledged. PORT MORESBY 22 nd June 2015

2 1. GENERAL OVERVIEW Economic indicators available to the Bank of Papua New Guinea (the Bank) show that activity improved slightly in the first quarter of 2015, though it remained weaker than a year ago. There were positive signs of strengthening activity in some non-mineral sectors, whilst the strong growth in the mineral sector continued to be driven by the production of LNG. After declining in the second half of 2014, employment returned to positive growth led by the agriculture/forestry/fisheries and the manufacturing sectors. This is expected to be reflected early in 2015 in the non-mineral sector sales, which declined in the last quarter of 2014 due to poor commodity prices. However, total sales in 2014 were up from a year ago driven by the commencement of LNG production. In the March quarter of 2015, the weighted average kina price of Papua New Guinea's exports declined by 35.5 percent from the corresponding quarter in 2014. Despite this, the total value of exports was 85.9 percent higher, largely attributed to the export of LNG and related products. The annualized growth of the private sector credit was weak at 0.5 percent. A fiscal deficit was recorded during the quarter reflecting lower revenue collection. The annual headline inflation was 6.1 percent. The Bank continued to take a cautious approach in its monetary policy stance by maintaining the Kina Facility Rate at 6.25 percent. Data from the Bank's Business Liaison Survey show that the total nominal value of sales in the private sector increased by 0.6 percent in the December quarter of 2014, compared to a decline of 3.2 percent in the September quarter. Excluding the mineral sector, sales declined by 0.6 percent, following a decline of 5.4 percent in the previous quarter. By sector, sales increased in the financial/ business and other services, manufacturing and mineral sectors, while the retail, construction, transportation, wholesale and the agriculture/forestry/fisheries sectors recorded declines. By region, sales increased in the Highlands, NCD and the Islands regions, whilst they decreased in Morobe, Southern and Momase. In 2014, the total value of sales increased by 4.3 percent, while excluding the mineral sector, sales declined by 7.0 percent. The Bank's Employment Index shows that the level of employment in the private sector increased by 1.0 percent in the March quarter of 2015, compared to a decline of 3.0 percent in the December quarter of 2014. Excluding the mineral sector, the level of employment increased by 1.1 percent reflecting growth in the agriculture/forestry/ fisheries, manufacturing, and the financial/ business and other services sectors. The transportation, construction, mineral, retail and the wholesale sectors recorded marginal declines. By region, the level of employment increased in all regions, except for Morobe and the Highlands. Over the year to March 2015, the total level of employment declined by 2.8 percent, while excluding the mineral sector, it declined by 2.7 percent. Quarterly headline inflation, as measured by the Consumer Price Index, increased by 1.5 percent in the March quarter of 2015, compared to an increase of 1.4 percent in the December quarter of 2014. There were increases in the 'Health', 'Alcoholic Beverages, Tobacco and Betelnut', 'Housing', 'Household Equipment', 'Clothing and Footwear', 'Food and Non-Alcoholic Bev erages', 'Restaurants and Hotels' and 'Communications' expenditure groups. The 'Education' expenditure group recorded no change, while the 'Recreation', 'Transport' and 'Miscellaneous' expenditure groups recorded declines. Prices increased in all urban centres, except for Goroka/Mt Hagen/Rabaul where they declined. The annual headline inflation to March 2015 was 6.1 percent, compared to 6.6 percent in December 2014. The annual underlying inflation was 5.3 percent for the exclusion-based measure and 4.8 percent for the trimmed-mean measure. During the March quarter of 2015, the average daily kina exchange rate appreciated against all the major currencies, except for the US dollar. It appreciated against the euro by 7.0 percent to 0.3371, the Australian dollar by 4.9 percent to 0.4829, the pound sterling by 0.9 percent to 0.2509 and the Japanese yen by 0.5 percent to 45.2778. It depreciated against the US dollar by 3.4 percent to 0.3802. These movements resulted in the appreciation of the daily average trade weighted index by 1.9 percent to 36.3. The weighted average kina price of Papua New Guinea's exports declined by 35.5 percent in the March quarter of 2015, compared to an increase of 1.9 percent in the corresponding period of 2014. There was a decline of 40.7 percent in the weighted average kina price of mineral exports with lower prices mainly for gold, copper, crude oil and cobalt. For agricultural, logs and marine product exports the weighted average kina

3 price declined by 6.0 percent due to lower prices for palm oil, tea, rubber and marine products. Excluding logs, the weighted average kina price of agricultural and marine product exports declined by 10.5 percent in the March quarter of 2015, compared to the corresponding quarter of 2014. The lower kina export prices reflected weak international commodity prices. The balance of payments recorded an overall deficit of K210.0 million in the March quarter of 2015, compared to a deficit of K182.0 million in the corresponding period of 2014. The deficit was due to a net outflow in the capital and financial account, which more than offset a surplus in the current account. The outcome in the current account was due to higher trade surplus, combined with lower service payments and higher transfer receipts. The deficit in the capital and financial account was mainly due to net outflows in other investments reflecting build-up in the net foreign assets of the domestic banking sector, foreign currency account balances of resident mineral sector companies and net Government loan repayments. The level of gross foreign exchange reserves at the end of March 2015 was US$2,168.4 (K5,770.4) million, sufficient for 9.0 months of total and 13.9 months of non-mineral import covers. The Central Bank maintained its neutral stance of monetary policy by keeping the Kina Facility Rate at 6.25 percent during the March quarter of 2015. Although inflation progressively increased in 2014, reaching 6.6 percent in the December quarter, it was considered manageable. In addition, the Bank had lower expectations for inflation in 2015 and was cautious in its approach as it monitored the impact of the large Government spending from the implementation of the 2015 Budget and 2014 Supplementary Budget. Domestic interest rates generally declined over the March quarter of 2015, with rates for short-term securities decreasing for all maturity terms. There was a net CBB issuance of K252.0 million during the quarter, while the Government's financing needs resulted in a net issuance of K400.4 million in Treasury bills and K79.0 million in Inscribed stocks. The average level of broad money supply (M3*) increased by 1.9 percent in the March quarter of 2015, compared to an increase of 2.6 percent in the December quarter of 2014. This outcome was influenced by an increase in average net claims on the Central Government. The average net domestic claims outstanding, excluding net claims on the Central Government, increased by 3.0 percent in the March quarter of 2015, following an increase of 5.1 percent in the December quarter of 2014. The average level of monetary base (reserve money) decreased by 1.1 percent in the March quarter of 2015, after it increased to 7.9 percent in the previous quarter. This reflected declines in commercial banks' deposits at the Central Bank and currency in circulation. The average level of deposits in other depository corporations (ODCs) increased by 0.8 percent to K19,930.7 million in the March quarter of 2015, from K19,763.5 million in the previous quarter. This mainly reflected increase in deposits of the private sector, ODCs and public nonfinancial corporations. The net foreign assets of the financial corporations, which comprise depository corporations (DCs) and other financial corporations (OFCs), increased by 0.1 percent to K8,241.4 million in the March quarter of 2015, compared to a decline of 2.3 percent in the December quarter of 2014. This resulted from an increase in the net foreign assets of ODCs, reflecting foreign exchange inflows from a public asset sale. In spite of the increase, the high demand for foreign currency continued to exert downward pressure on the kina. The Central Bank intervened in the foreign exchange market to assist in meeting the demand for foreign currency. Net claims on the Central Government increased by K538.3 million to K7,293.0 million in the March quarter of 2015, compared to an increase of K729.8 million in the previous quarter. This resulted from increased issuance of securities by the Government to finance the 2015 Budget. In the March quarter of 2015, total domestic credit extended by financial corporations to the private sector, public non-financial corporations, Provincial and Local level Governments, and other financial corporations increased by K16.4 million to K14,448.2 million. This compares to an increase of K903.1 million in the previous quarter and was due to an increase of K82.0 million in credit to the private sector, which more than offset a decline of K66.6 million from the public nonfinancial corporations. The growth in credit to the private sector reflected advances by the ODCs to the

4 'transport and communication', 'building and construction', 'mining and quarrying', 'hotels and restaurants' and 'real estate, renting and business services' sectors, as well as the household sector for personal loans. The annualised growth in domestic credit, excluding Central Government, was 0.5 percent in the March quarter of 2015. Preliminary estimates of the fiscal operations of the National Government over the three months to March 2015 showed an overall deficit of K405.1 million, compared to a surplus of K105.2 million in the corresponding period of 2014. This represents 0.8 percent of nominal GDP and reflected lower revenue. Total revenue, including foreign grants, during the March quarter of 2015 was K1,400.5 million, 30.1 percent lower than the receipts collected in the corresponding period of 2014. This represents 10.1 percent of the budgeted revenue for 2015. The decrease in revenue mainly reflected lower collections in both direct and indirect taxes and non-tax receipts, which more than offset a slight increase in foreign grants. Total expenditure for the first three months to March 2015 was K1,805.6 million, 4.9 percent lower than in the corresponding period of 2014 and represents 11.2 percent of the budget appropriation for 2015. This outcome reflected lower recurrent expenditure, which more than offset an increase in development expenditure. As a result of the developments in revenue and expenditure, the Government recorded a budget deficit of K405.1 million. The deficit and net external loan repayments of K63.3 million were financed from domestic sources with K468.4 million. External loan repayments comprised of K32.9 million, K16.3 million and K14.1 million to concessional, commercial and extraordinary sources, respectively. Domestic financing comprised net purchases of Government securities totalling K223.7 million, K285.4 million and K210.4 million by the Central Bank, ODCs and OFCs, respectively. These more than offset K251.1 million payments by other resident sectors, mainly cheques presented for encashment. Total public (Government) debt outstanding in the March quarter of 2015 was K16,145.2 million, K789.7 million higher than in the December quarter of 2014. Both domestic and external loans increased. The increase in domestic debt resulted from net new issuance of Treasury bills and Inscribed stocks, while the increase in external debt mainly reflected the depreciation of the kina. The total amount of Government deposits in the depository corporations decreased by K172.4 million to K4,165.9 million in March 2015, compared to K4,338.3 million in December 2014.

5 2. INTERNATIONAL DEVELOPMENTS The world economy continued to grow at a steady pace in the first quarter of 2015, supported by strengthening economic activity in some advanced countries. Growth remained robust in the United States and the United Kingdom on account of stronger domestic demand in both countries, while in Japan growth was stronger during the quarter though it contracted over the year. Emerging market economies continued to experience weak economic activity, with China introducing measures to stimulate the housing market and increase consumption. Global inflation remained low primarily due to lower food and energy prices. The oil price rebounded towards the end of the quarter after reaching a new minimum below US$50 per barrel around mid- January. According to the IMF's World Economic Outlook published in April, global economic outlook remains positive in 2015 with the world output expected to grow by 3.5 percent. In January 2015, the 45 th annual meeting of the World Economic Forum was held in Davos-Klosters, Switzerland, under the theme "The New Global Context". The event focused on 10 challenge initiatives that will take global priority in 2015, among them rising income disparity and social inequality, the future of the Internet and growing geopolitical tensions. On growth and stability, the key message was that despite the recovery of the global economy from the 2008 financial crisis, many countries need structural reforms to make growth sustainable and bring down unemployment and inequality. These reforms should address labour market challenges, improve the quality of education and support investment in basic healthcare delivery. Another key message of the event was the need for a global international response to terrorism from both the public and the private sectors, particularly in the light of the conflict between Ukraine and Russia, the eruption of ISIS and the attacks in Paris. Further, the forum launched a multi-year initiative to help strengthen trust and expand cooperation on internet-related challenges and opportunities. The purpose is to help develop the internet as a core engine of human progress and safeguard its globally integrated and multi-stakeholder nature. Also in January, the APEC Business Advisory Council (ABAC) met in Hong Kong and adopted their 2015 work program and priorities under the theme "Resilient, Inclusive Growth: A Fair Deal for All". The program priorities on issues such as accelerating regional economic integration and the services agenda; strengthening and facilitating small, medium and micro enterprises (SMMEs) entry into global markets; maximizing innovation and human capital potential; and promoting liveable, sustainable cities and resilient communities. During the discussions, Doris Ho, ABAC's Chair, highlighted the importance of improving both inclusiveness and resilience so that APEC can achieve sustained economic growth, job creation and ensure financial stability. She also mentioned that although progress has been made towards the Free Trade Area of the Asia Pacific (FTAAP), it needs to take into account the health of global value and supply chains. ABAC will be developing recommendations to enhance SMMEs access to ideas, markets, financing, technology and entrepreneurial skills. The 21 st Association of South East Asian Nations (ASEAN) Economic Ministers' Retreat was held in February in Kota Bharu, Malaysia. The ministers expressed confidence that the region's economies will maintain the growth momentum in 2015, in spite of the global economic and geopolitical challenges. The ministers expect that ASEAN economic performance will improve to 5.1 percent, above the 3.5 percent global growth projection, though the falling oil prices could affect the region's export earnings and government revenue for oil and gas exporting economies. The ministers welcomed the steady progress towards building the Asian Economic Community (AEC) and noted that the benefits are already flowing to ASEAN businesses and consumers from significant tariff liberalisation, progress in trade facilitation measures such as self-certification, simplification of customs procedures and the Mutual Recognition Arrangements on the movement of skilled professionals in the region. The formal establishment of the AEC by end-2015 will mark a major milestone in building a more integrated region. In March, the 19 th Middle East Oil & Gas Conference was held in Manama, Bahrain. It was chaired by the Secretary General of the Organization of Petroleum Export Countries (OPEC), HE Abdalla S El-Badri, who explained that although the oversupply of oil put significant downward pressure on prices, the magnitude of the drop in oil prices indicates that market fundamentals were not the only drivers. He stressed that speculators also played a role in the fall. He also

6 stated that current lower oil prices provide challenges as a number of projects are cancelled or postponed and investment plans are reviewed. He stressed further the importance of collaboration between the national and international oil companies as well as service providers, and appealed to them to streamline the industry and discuss views for the future. As at the end of March, the average international price of oil was US$52.8 per barrel. In the US, real GDP increased by 3.0 percent over the year to March 2015, compared to a growth of 2.3 percent over the same period in 2014. The quarterly increase reflected higher consumer spending, particularly on household services, and higher inventory investment in the non-durable goods manufacturing industry. These positive contributions, though, were partly offset by declines in goods exports and business investment in mining exploration, shafts and wells. The IMF forecast real GDP to grow by 3.1 percent in 2015. Industrial production grew by 2.0 percent over the year to March 2015, compared to a growth of 3.8 percent over the same period in 2014. The Purchasing Managers Index, an economic indicator published by the Institute for Supply Management, was 51.5 percent in March 2015, compared to 55.5 percent in December 2014, indicating a slowdown in the manufacturing industry. Retail sales increased by 4.4 percent over the year to March 2015, compared to an increase of 4.0 percent in the corresponding period in 2014, reflecting a slight increase in consumer demand. The unemployment rate was 5.5 percent in March 2015, lower than the 6.7 percent in March 2014 as business conditions continue to improve. Consumer prices fell by 0.1 percent in the March quarter of 2015, compared to an increase of 1.5 percent over the corresponding period in 2014. This decline was caused by lower international food and energy prices. Broad money supply increased by 6.2 percent over the year to March 2015, compared to 6.0 percent over the same period in 2014. The Federal Reserve kept the Federal Funds rate unchanged between zero and 0.25 percent to encourage borrowing and stimulate economic activity. The trade deficit was US$743.3 billion over the year to March 2015, compared to a deficit of US$706.8 billion over the corresponding period in 2014. The trade gap widened as the strong dollar hindered exports and a labour dispute at West Coast ports, where most imports from Asia are delivered, was resolved causing a surge in imports. In Japan, real GDP declined by 1.4 percent over the year to March 2015, compared to a growth of 0.7 percent over the same period in 2014. Although the economic activity was lower than a year ago, Japan recorded a robust growth in the first quarter of 2015 supported by the solid recoveries in private consumption and residential investments. The IMF forecasted real GDP to grow by 1.0 percent in 2015. Industrial production declined by 1.7 percent over the year to March 2015, compared to an increase of 7.4 percent over the same period in 2014. The decrease was attributed to the sales tax hike in 2014, as firms cut back on expansion of operations and investment, despite modest recovery in private spending. The retail sales declined by 9.7 percent over the year to March 2015, compared to an increase of 5.7 percent over the corresponding period in 2014. The weak sales were the result of the negative rebound from March 2014 when the Japanese consumers brought forward their purchases ahead of the tax increase in April 2014. The level of unemployment increased to 3.4 percent, compared to 3.6 percent in March 2014 as labour market conditions continue to improve. Consumer prices increased by 2.3 percent over the year to March 2015, compared to an increase of 1.6 percent over the corresponding period in 2014, as a result of price increase in the fuel, electricity and water charges. Broad money supply (M3) increased by 2.9 percent over the year to March 2015, compared to 4.1 percent over the year to March 2014. The Bank of Japan continues to implement additional quantitative easing measures by buying 80 trillion yen per annum with the view to encourage price rises of 2 percent a year. It maintained its policy rate between zero and 0.8 percent in the March quarter of 2015. The trade deficit was US$54.7 billion over the year to March 2015, compared to a deficit of US$105.6 billion in the corresponding period of 2014. The lower trade deficit was attributed to lower imports as purchases for manufacturing products, machinery, petroleum products and food stuff declined. In the Euro area, real GDP grew by 1.0 percent over the year to March 2015, compared to 0.9 percent over the same period in 2014. The growth reflected strong domestic demand, including increased retail activities

7 in Ireland, Italy, France and Germany. The IMF forecasted real GDP to grow by 1.5 percent in 2015. Industrial production increased by 1.8 percent over the year to March 2015, compared to a decline of 0.1 percent over the same period in 2014. The increase was mainly driven by the manufacturing of durable goods in Spain, Ireland, France, Portugal and Greece. Retail sales increased by 1.6 percent over the year to March 2015, compared to 0.9 percent over the same period in 2014. The level of unemployment was 11.3 percent in March 2015, compared to 11.9 percent in March 2014. Consumer prices in the Euro area, as measured by the Harmonized Index of Consumer Prices, declined by 0.1 percent over the year to March 2015, compared to an increase of 0.6 percent over the same period in 2013. Broad money supply increased by 4.6 percent over the year to March 2015, compared to an increase of 1.0 percent over the corresponding period in 2014. The European Central Bank (ECB) maintained its refinancing rate at 0.05 percent in the March quarter of 2015. The ECB continued to purchase eurodenominated public sector securities with the aim of achieving an inflation rate below or close to 2.0 percent. The trade surplus was US$272.4 billion over the year to March 2015, compared to a surplus of US$221.7 billion over the same period in 2014. The higher trade surplus was attributed stronger exports from Spain, Germany, France and Portugal. In the United Kingdom, real GDP increased by 2.4 percent over the year to March 2015, compared to an increase of 3.1 percent over the corresponding period in 2014. The slight slowdown was related to weaker activity in the manufacturing, construction and the mining and quarrying sectors. The IMF forecasted real GDP to grow by 2.7 percent in 2015. Industrial production increased by 0.6 percent over the year to March 2015, compared to an increase of 2.3 percent over the same period in 2014. The retail sales increased by 4.2 percent over the year to March 2015, the same growth as in the corresponding period in 2014. The unemployment rate was 5.5 percent in March 2015, compared to 6.8 percent in March of the same period in 2014. Consumer prices declined by 0.1 percent over the year to March 2014, compared to an increase of 1.6 percent over the same period in 2014 due to a fall in energy prices. Broad money supply declined by 2.0 percent over the year to March 2015, compared to an increase of 0.7 percent over the same period in 2014. The Bank of England maintained its policy rate at 0.5 percent in the March quarter of 2015. The trade account deficit was US$194.2 billion over the year to March 2015, compared to a deficit of US$172.6 billion over the same period in 2014. The widening of the trade deficit reflects a decline in exports of oil to EU countries. In China, real GDP grew by 7.0 percent over the year to March 2015, compared to an increase of 7.4 percent over the same period in 2014. The economic growth slowed on account of weak domestic and foreign demand. The IMF forecasted real GDP to grow by 6.8 percent in 2015. Industrial production increased by 5.6 percent over the year to March 2015, compared to an increase of 8.8 percent over the same period in 2014. The slowdown reflected weak activity in the manufacturing of durable and producer goods such as oil, fertilizers, as well as iron and steel products. The level of unemployment was 4.1 percent over the year to March 2015, the same as in the corresponding period in 2014. Consumer prices increased by 1.5 percent over the year to March 2015, compared to an increase of 2.4 percent over the same period in 2014. In light of the slowdown in China's economic growth, the People's Bank of China cut its policy rate to 5.35 percent in the March quarter of 2015 and lowered the reserve requirement ratio for all commercial banks by 100 basis points to 18.5 percent. In Australia, real GDP increased by 2.5 percent over the year to March 2015, compared to an increase of 3.5 percent over the same period in 2014. The slowdown reflected weak activity in the manufacturing sector, lower capital investment sectors and slowing private consumption. The IMF forecasted real GDP to grow by 2.8 percent in 2015. Industrial production grew by 2.8 percent over the year to March 2015, compared to an increase of 5.7 percent over the corresponding period of 2014. This was associated with a slowdown in activities in the mining and the manufacturing sector, mainly the production of

8 textiles and clothing, food products and utilities. Retail sales increased by 2.8 percent over the year to March 2015, compared to an increase of 3.2 percent over the corresponding period in 2014, reflecting a slowdown in consumer demand. The unemployment rate was 6.1 percent in March 2015, compared to 5.8 percent in March 2014. 0.50 0.45 0.40 EXCHANGE RATES United States dollar per kina Consumer prices increased by 1.3 percent over the year to March 2015, compared to an increase of 2.9 percent over the corresponding period in 2014. Broad money supply increased by 7.7 percent over the year to March 2015, compared to an increase of 6.5 percent over the corresponding period in 2014. The Reserve Bank of Australia kept its official cash rate unchanged at 2.25 percent in the March quarter of 2015, down by 25 basis points from the last reduction in December 2014. The trade account recorded a deficit of US$7.0 billion over the year to March 2015, compared to a surplus of US$23.9 billion over the same period in 2014. Both imports and exports fell in the quarter as low commodity prices affected Australia's major exports, while the depreciation of the Australian dollar in the first quarter reduced imports. In the March quarter of 2015, the US dollar appreciated against all major currencies. It appreciated against the euro by 10.7 percent, the Australian dollar by 8.6 percent, pound sterling by 4.4 percent, Japanese yen by 4.3 percent and New Zealand dollar by 3.9 percent. During the March quarter of 2015, the average daily kina exchange rate appreciated against all the major currencies, except for the US dollar. It appreciated against the euro by 7.0 percent to 0.3371, the Australian dollar by 4.9 percent to 0.4829, the pound sterling by 0.9 percent to 0.2509 and the Japanese yen by 0.5 percent to 45.2778. It depreciated against the US dollar by 3.4 percent to 0.3802. These movements resulted in the appreciation of the daily average trade weighted index by 1.9 percent to 36.3. 0.35 0.30 0.60 Australian dollar per kina 0.50 0.40 0.30 50 Japanese yen per kina 45 40 35 30 0.40 0.35 0.30 0.25 0.20 0.35 2008 2009 2010 2011 2012 2013 2014 Euro per kina Special Drawing Rights per kina 3. DOMESTIC ECONOMIC CONDITIONS 0.30 DOMESTIC ECONOMIC ACTIVITY 1 0.25 Data from the Bank's Business Liaison Survey (BLS) show that the total nominal value of sales in the private 0.20

9 sector increased by 0.6 percent in the December quarter of 2014, compared to a decline of 3.2 percent in the September quarter. Excluding the mineral sector, sales declined by 0.6 percent, following a decline of 5.4 percent in the previous quarter. By sector, sales increased in the financial/business and other services, manufacturing and mineral sectors, while the retail, construction, transportation, wholesale and the agriculture/forestry/fisheries sectors recorded declines. By region, sales increased in the Highlands, NCD and the Islands regions, whilst they decreased in Morobe, Southern and Momase. In 2014, the total value of sales increased by 4.3 percent, while excluding the mineral sector, sales declined by 7.0 percent. In the financial/business and other services sector, sales increased by 4.9 percent in the December quarter of 2014, following a decline of 14.2 percent in the previous quarter. The increase was primarily driven by strong commercial bank earnings in all areas of the business, though particularly from foreign currency transactions and healthy net interest margins. In 2014, sales in this sector declined by 19.5 percent, compared to an increase of 20.0 percent in 2013. The introduction of the foreign exchange trading band in June 2014 resulted in a fall in the foreign exchange earnings and, consequently, a decline in annual income. In the manufacturing sector, sales increased by 2.8 percent in the December quarter, compared to a decline of 8.8 percent in the September quarter of 2014. The outcome was attributed to a higher output volume at Napanapa Oil Refinery following a brief closure in the previous quarter, more electricity production, and increased processing of rice and tobacco products to meet domestic demand. In 2014, sales declined by 10.2 percent, compared to an increase of 8.9 percent in 2013. In the mineral sector, sales increased by 2.7 percent in the December quarter of 2014, compared to an increase of 1.3 percent in the previous quarter. The PNG LNG project recorded its first full quarter of production in December, driving the growth in this sector. Copper and gold production by OK Tedi and Simberi, respectively, also increased, partially offsetting a decline in production at the Ramu Nickel/Cobalt mine. In 2014, sales in the mineral sector increased by 41.2 percent, compared to an increase of 27.8 percent in 2013. In the retail sector, sales declined by 0.9 percent in the December quarter, compared to an increase of 10.3 percent in the September quarter of 2014. The decline was mainly caused by weaker sales of heavy machinery and equipment, as demand returned to trend levels following a spike in the previous quarter. Lower sales of various consumer goods and electronics in NCD and the Highlands also contributed to the decline. In 2014, sales in the retail sector declined by 6.4 percent, compared to a decline of 13.8 percent in 2013. In the construction sector, sales declined by 2.7 percent in the December quarter of 2014, compared to an increase of 13.0 percent in the previous quarter. The decline was caused by lower disbursements on donorfunded programmes and by a slowdown in construction work commissioned by the OK Tedi mine and the Ok Tedi Development Foundation in the Western Province. However, this fall was largely offset by other private sector construction activities in NCD and the Southern region along with the on-going Government-funded construction of physical infrastructure and facilities for the 2015 Pacific Games. In 2014, sales in this sector increased by 6.1 percent, compared to a growth of 161.7 percent a year ago. In the transportation sector, sales declined by 2.8 percent in the December quarter of 2014, compared to a decline of 2.4 percent in the September quarter. This was mainly driven by an air passenger carrier which experienced declines in sales as increased competition drove prices down and caused a decline in its passenger numbers. However, the demand for sea freight services was strong partially offsetting this decline. In 2014, sales declined by 0.1 percent, compared to a fall of 14.1 percent in 2013. In the wholesale sector, sales declined by 4.7 percent in the December quarter, compared to a fall of 4.8 percent in the September quarter of 2014. The decline was mainly due to lower revenue from sales by two major fuel distributors as a result of the decline in the international crude oil prices. Also contributing to the decline in sales was a fall in coffee exports as the peak coffee season came to an end. In 2014, sales increased by 4.9 percent, compared to an increase of 9.5 percent in 2013. 1 The quarterly growth rates for the September quarter have been revised. The December figures are preliminary.

10 In the agriculture/forestry/fisheries sector, sales declined by 14.6 percent in the December quarter of 2014, following a decline of 10.6 percent in the previous quarter. The decline was attributed to lower prices and production of palm oil, coffee, tea, and lower catchment of tuna. It was only partially offset by strong sales in the forestry sub-sector. In 2014, sales declined by 27.1 percent, compared to an increase of 101.1 percent in 2013. By region, the sales revenue increased in NCD, Highlands and the Islands, while it declined in Morobe, Southern and Momase. In the Highlands region, sales increased by 2.7 percent in the December quarter of 2014, compared to an increase of 31.5 percent in the previous quarter. The PNG LNG project continued to drive growth in this region, recording its first full quarter of production in December. The retail and wholesale sectors recorded strong growth, though this was offset by weaker coffee and tea sales as well as a slowdown in construction activities. In 2014, the Highlands region recorded the largest growth in sales of 54.6 percent, compared to an increase of 77.5 percent in 2013. In NCD, sales increased by 2.7 percent in the December quarter of 2014, compared to a decline of 12.2 percent in the previous quarter. The increase was primarily driven by the financial sub-sector, reflecting strong commercial bank earnings in all business areas - lending, foreign currency transactions and investments. A strong demand for consumer goods during the Christmas festive season, coupled with increased electricity production and fuel sales also added to the revenue growth. In 2014, sales declined by 8.5 percent, compared to an increase of 11.6 percent in 2013. In the Islands region, sales increased by 1.0 percent in the quarter, compared to a decline of 3.7 percent in the September quarter of 2014. This increase was driven by improved gold production and export by both Simberi and Lihir mines, as well as higher production and sales in the palm oil industry. Marginal increases were also recorded in the manufacturing and wholesale sectors. These more than offset a large decline in the retail sector. In 2014, sales in this region increased by 1.5 percent, compared to an increase of 11.7 percent in 2013. In Morobe, sales declined by 1.3 percent in the December quarter, compared to an increase of 0.7 percent in the September quarter of 2014. There were lower sales of tyres and motor vehicles, combined with lower sales of heavy machinery and equipment to the mining sector. This is in addition to weaker sales revenue being recorded by two major fuel distributors, which partly offset strong sales revenue by food and household product manufacturers. In 2014, sales declined by 1.4 percent, compared to a decline of 8.0 percent in 2013. In the Southern region, sales declined by 2.1 percent in the December quarter of 2014, compared to a decline of 37.4 percent in the previous quarter. A major decline in sales was recorded in the retail sector on account of weaker demand for heavy machinery and equipment, vehicles and various consumer goods. In addition, a major air passenger carrier experienced declines in sales as increasing competition in the air transportation sector drove down prices and caused a decline in its passenger numbers. In 2014, the Southern region recorded the largest decline in sales of 16.0 percent, compared to a decline of 26.9 percent in 2013. Momase recorded a decline of 10.5 percent in the December quarter of 2014, compared to an increase of 6.9 percent in the preceding quarter. This decline was primarily caused by weaker exports of Nickel and Cobalt in response to a decline in international prices. Sales recorded by two major fuel distributors and a number of consumer goods retailers were also lower, offsetting a positive contribution from the manufacturing sector. In 2014, sales in this region fell by 14.1 percent, compared to an increase of 83.2 percent in 2013. EMPLOYMENT 2 The Bank's Employment Index shows that the level of employment in the private sector increased by 1.0 percent in the March quarter of 2015, compared to a decline of 3.0 percent in the December quarter of 2014. Excluding the mineral sector, the level of employment increased by 1.1 percent reflecting growth in the agriculture/forestry/fisheries, manufacturing, and the financial/business and other services sectors. The transportation, construction, mineral, retail and the wholesale sectors recorded marginal declines. By region, the level of employment increased in all regions, except for Morobe and the Highlands. Over the year to 2 The quarterly growth rates for the December 2014 quarter have been revised. The March 2015 figures are preliminary.

11 March 2015, the total level of employment declined by 2.8 percent, while excluding the mineral sector, it declined by 2.7 percent. In the agriculture/forestry/fisheries sector, the level of employment increased by 2.3 percent in the March quarter of 2015, following a decline of 4.0 percent in the previous quarter. The growth was attributed to a seasonal increase in the workforce to meet the demand during the palm oil and sugar harvesting season. Several extension programs on palm oil and balsa tree plantations also contributed to this growth. Over the year to March 2015, the level of employment declined by 0.2 percent. In the manufacturing sector, the level of employment increased by 1.4 percent in the March quarter of 2015, compared to a decline of 2.0 percent in the December quarter of 2014. The increase is largely explained by the resumption of operations by two major tuna processing facilities. In addition, a balsa processing facility in East New Britain significantly increased its workforce to meet the growing demand for dried balsa wood from Europe and China. Over the year to March 2015, the level of employment declined by 4.3 percent. In the transportation sector, the level of employment declined by 0.3 percent in the March quarter of 2015, compared to a decline of 0.4 percent in the previous quarter. The decline was mainly associated with a shutdown of operations by a major transportation company in the Highlands region and scaling down of its shipping operations in Lae. Over the year to March 2015, the level of employment declined by 7.5 percent. In the construction sector, the level of employment declined by 0.5 percent in the March quarter of 2015, compared to a decline of 10.0 percent in the previous quarter. The decline in employment was due to the completion of several Government-funded road infrastructure projects, including the re-sealing project at Wutung office and the West New Britain Highway. The completion of Government and donor-funded school buildings in Morobe also contributed to the decline. Bad weather also affected the re-sealing of the airstrip or airport at Mt Hagen and Kimbe and workers were laid off as a result. Over the year to March 2015, the level of employment in this sector declined by 0.9 percent. In the wholesale sector, the level of employment declined by 0.3 percent in the quarter, following a decline of 1.0 percent in the December quarter of 2014. 180 170 160 150 140 130 Formal Private Sector Employment Index Based: March 2002=100 The decline was due to cost reduction measures implemented by a number of wholesale companies and a reduction associated with the end of the festive season. Over the year to March 2015, the level of employment declined by 6.4 percent. In the mineral sector, the level of employment declined by 0.7 percent in the March quarter of 2015, compared to an increase of 0.5 percent in the previous quarter. The decline was mainly due to the completion of a work experience programme at the Porgera Gold mine and the redundancy exercise undertaken by the Tolukuma Gold mine following its closure. Over the year to March 2015, the level of employment declined by 6.8 percent. In the financial/business and other services sector, the level of employment increased by 1.8 percent in the March quarter of 2015, compared to a decline of 0.8 percent in the December quarter of 2014. This was mainly attributed to the recruitment of workers by a major hotel following the opening of its new hotel accommodation in NCD. In addition, the recruitment by a security and catering firm to keep up with the demand for their services also contributed to this growth. Over the year to March 2015, the level of employment declined by 1.7 percent. In the retail sector, the level of employment declined by 1.6 percent in the March quarter of 2015, compared to a decline of 0.2 percent in the previous quarter. Several major retail companies reduced their seasonal workforce after the Christmas festive season. Over the year to March 2015, the level of employment declined by 2.9 percent. The level of employment increased in most regions,

12 except for Morobe and the Highlands region where it declined. In Momase, the level of employment increased by 4.3 percent in March quarter of 2015, compared to a decline of 3.0 percent in the previous quarter. The increase was due to the resumption of operations by two major tuna processing facilities and recruitment of seasonal employees at a sugar and palm oil company. Over the year to March 2015, the level of employment increased by 5.3 percent. In the Southern region, the level of employment increased by 3.6 percent in the March quarter of 2015, compared to a decline of 2.0 percent in the previous quarter. This increase was due to the commencement of the palm oil harvest season and a road construction project in the Gulf province. Over the year to March 2015, the level of employment increased by 0.9 percent. In NCD, the level of employment increased by 1.2 percent in the March quarter of 2015, compared to a decline of 6.6 percent in the previous quarter. The increase was attributed to the construction of facilities for the Pacific Games, including the Bisini sporting field upgrades, as well as the recruitment of workers by a major hotel to serv ice its newly opened accommodation. In addition, recruitment by a security firm to keep up with demand for its services also contributed to this increase. Over the year to March 2015, the level of employment declined by 7.2 percent. In the Islands region, the level of employment grew by 1.3 percent in the March quarter of 2015, compared to an increase of 0.6 percent in the previous quarter. The increase was driven by seasonal employment by two major palm oil companies. Several extension programs on palm oil and balsa tree plantations combined with a donor-funded construction of a school building project in East New Britain also contributed to this growth. Over the year to March 2015, the level of employment rose by 1.7 percent. In Morobe, the level of employment declined by 0.3 percent in the March quarter of 2015, compared to a decline of 2.2 percent in the December quarter of 2014. The decline was mainly due to the scaling down of operations by a major transportation company, the completion of Government and donor-funded infrastructure projects, as well as the temporary shutdown of a fish cannery to allow for repair and maintenance. Over the year to March 2015, Morobe experienced the largest drop in employment of 10.2 percent. In the Highlands region, the level of employment declined by 5.1 percent in the March quarter of 2015, compared to a decline of 4.0 percent in the previous quarter. The decline was attributed to the completion of road projects, a fall in seasonal employment after the end of the coffee harvest season, laying-off of vacation employees at Porgera Gold mine and a shutdown of operations by a major transportation company. Over the year to March 2015, the level of employment increased by 2.9 percent. CONSUMER PRICE INDEX Quarterly headline inflation, as measured by the Consumer Price Index (CPI), increased by 1.5 percent in the March quarter of 2015, compared to an increase of 1.4 percent in the December quarter of 2014. There were increases in the 'Health', 'Alcoholic Beverages, Tobacco and Betelnut', 'Housing', 'Household Equipment', 'Clothing and Footwear', 'Food and Non- Alcoholic Beverages', 'Restaurants and Hotels' and 'Communications' expenditure groups. The 'Education' expenditure group recorded no change, while the 'Recreation', 'Transport' and 'Miscellaneous' expenditure groups recorded declines. Prices increased in all urban centres, except for Goroka/Mt Hagen/Rabaul where they declined. The annual headline inflation to March 2015 was 6.1 percent, compared to 6.6 percent in the December quarter of 2014. The CPI for the 'Health' expenditure group increased by 7.4 percent in the March quarter of 2015, compared to an increase of 7.9 percent in the previous quarter. The largest increase of 20.1 percent was recorded in the 'medical services' sub-group due to higher medical consultation fees, while the 0.2 percent increase in the 'medical supplies' sub-group was caused by price increases for antibiotics and pain killers. This expenditure group contributed 0.2 percentage points to the overall movement in the CPI. Prices in the 'Alcoholic Beverages, Tobacco and Betelnut' expenditure group increased by 5.6 percent in the March quarter of 2015, compared to an increase of 1.3 percent in the previous quarter. All sub-groups recorded price increases. The 'tobacco' sub-group recorded the largest increase of 12.7 percent as a result of significant increases in prices for all items in this sub-group. This was followed by a 3.6 percent increase in the 'betelnut and mustard' sub-group, while the 'alcoholic beverages' sub-group recorded the least increase of 2.3 percent. Much of the increase in the last

13 sub-group was driven by beer prices, as spirits and wines recorded lower increases. This expenditure group contributed 0.4 percentage points to the overall movement in the CPI. 3.5 3.0 Headline Consumer Price Index (percentage change over the quarter) The CPI for the 'Housing' expenditure group increased by 4.7 percent in the March quarter, compared to 3.2 percent in the December quarter of 2014. The 'rent' subgroup recorded the largest increase of 12.1 percent reflecting prevailing high rental demand in Port Moresby, followed by the 'housing maintenance' sub-group with 8.4 percent. Both the 'water' and 'electricity' subgroups recorded no change, while the 'cooking' subgroup recorded a decline. This expenditure group contributed 0.5 percentage points to the overall movement in the CPI. The CPI for the 'Household Equipment' expenditure group increased by 2.7 percent in the March quarter of 2015, compared to an increase of 2.8 percent in the previous quarter. All sub-groups recorded increases with 'household furniture & furnishings' sub-group recording the largest increase of 5.1 percent, followed by 'household maintenance goods' with 2.2 percent. The 'household appliances' sub-group recorded the least increase of 1.9 percent. This expenditure group contributed 0.1 percentage points to the overall movement in the CPI. Prices for the 'Clothing and Footwear' expenditure group increased by 1.0 percent in the quarter, compared to an increase of 3.7 percent in the December quarter of 2014. The 'women and girls wear' sub-group recorded the largest increase of 4.3 percent, followed by the 'clothing' sub-group with 2.0 percent increase. The 'footwear' sub-group recorded no change, while all the other sub-groups - 'menswear', 'boys wear', 'head wear' and 'sewing items' - recorded declines. This expenditure group contributed 0.1 percentage points to the overall movement in the CPI. The CPI for the 'Food and Non-Alcoholic Beverages' expenditure group increased by 0.8 percent in the March quarter of 2015, compared to an increase of 1.1 percent in the previous quarter. The 'fish' sub-group recorded the largest increase of 3.3 percent, followed by the 'meat', 'oils and fats', 'other food products', 'sugar and confectionery', 'dairy products, eggs and cheese' and 'cereals' sub-groups with 2.4 percent, 2.0 percent, 1.9 percent, 1.7 percent, 1.0 percent and 0.4 percent respectively. These movements more than offset price declines in the 'fruits and vegetables' and 'non-alcoholic 2.5 2.0 1.5 1.0 0.5 0 2012 2013 2014 2015 beverages' sub-groups. This expenditure group contributed 0.3 percentage points to the overall movement in the CPI. The CPI for the 'Restaurants and Hotels' expenditure group increased by 0.8 percent in the quarter, compared to a decline of 0.5 percent in the December quarter of 2014. The 'accommodation' sub-group recorded an increase of 1.7 percent, followed by an increase of 0.7 percent in the 'takeaway foods' sub-group. This expenditure group's contribution to the overall movement in the CPI was negligible. The 'Communication' expenditure group recorded an increase of 0.1 percent in the March quarter of 2015, compared to no change in the previous quarter. This outcome was primarily influenced by a 3.1 percent increase in the 'postal services' sub-group as all other sub-groups, namely, telephone services, telephone equipment, and other services recorded no change. This expenditure group's contribution to the overall movement in the CPI was negligible. The education fees and other education-related prices remained unchanged during the March quarter of 2015, the same as in the December quarter of 2014. Prices in the 'Recreation' expenditure group fell by 1.3 percent in the March quarter of 2015, compared to no change in the December quarter of 2014. This was accounted for by fall in prices for flash drives by 9.6 percent, digital cameras by 5.0 percent, DVD players by 4.5 percent and TV sets by 3.8 percent. These more than offset price increases for bicycles, magazines, and biros. There were no price changes for newspapers, sports gate and movie fees and photography. This expenditure group's contribution to the overall